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Terminating an Employee Requires Business Judgment and Basic Legal Understanding

As an entrepreneur, startup founder, or a manager in a growing company, you will most likely be entrusted with the power and responsibility to hire and fire employees. For the vast majority of people, the former activity is infinitely more fun than the latter. There is something a little dread-inducing about having to let someone go (even if you absolutely know it’s the right decision).

The act of firing someone requires the manager to use business judgment and take into account legal considerations at the same time. As a manager, you will typically be in the best position to use your business judgment to make the hard decision of terminating someone’s employment. However, even if the decision to terminate makes perfect business sense, it cannot be made without considering the legal ramifications. Employment law is complicated and presents many challenges for employers. Therefore, it’s always a good idea to give this decision careful thought (or consult with legal counsel) rather than making an impulsive decision that could prove costly to the organization down the road.

Legal Considerations in the United States

In the United States, all states except Montana follow the employment-at-will doctrine. This means that an employer can fire an employee for any reason even without just cause, as long as the termination doesn’t violate other laws or public policy exceptions. Other countries have different employment laws, which are frequently more stringent and restrictive of an employer’s ability to terminate an employee. This article focuses on US practices with respect to terminating an employment relationship.

When deciding to terminate an employee, you have to take into account the laws of the state where the employee works as well as federal law. Additionally, you need to determine whether the employee is employed at-will, as part of a formal employment contract, or as part of a union with collective bargaining rights. If your employee is under an employment contract or part of a union, you must follow the contractual termination procedures laid out in the employment contract or the collective bargaining agreement. If your employee is an at-will employee and your company has an employee handbook or other official employment policies, make sure you are following the procedures set forth in these policies.

While it may seem like stating the obvious, it’s worth repeating that as an employer, it is illegal for you to fire someone based on discriminatory grounds such as those covered by laws that are enforced by the US Equal Employment Opportunity Commision or EEOC. Under these laws, it’s illegal to discriminate against someone   

because of that person’s race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability or genetic information. It is also illegal to retaliate against a person because he or she complained about discrimination, filed a charge of discrimination, or participated in an employment discrimination investigation or lawsuit.

Additionally, numerous state and federal laws prohibit taking adverse action, including termination, against employees who report unsafe work conditions or other improprieties and illegal activities and employees who act as whistleblowers and expose bad behavior.

Practical Matters

As is probably apparent to you by now, while your workers may be at-will employees and you are free to hire and fire as you wish, many state and federal laws provide protections to employees who are fired for impermissible reasons. Even if you try to do everything by the book, it is inevitable that some employees may perceive the reason for their termination as illegal. Litigation can be a very costly and time consuming proposition, even if you ultimately prevail. Therefore, regardless of whether “the law is on your side”, there are some steps you could take to mitigate the legal risks inherent in terminating an employee.

What Can You Do to Mitigate Legal Risks?  

This may be more of an art than a science, but as a manager, one of the most important things you could do to mitigate legal risks when terminating an employee is to show empathy and understanding throughout the process. An employee who is treated with dignity and respect is far less likely to harbor resentment which could translate to a lawsuit down the road.

In addition to the commonsense measure of treating the terminated employee the way you would want to be treated, you could also reduce legal risk by negotiating and entering into a severance agreement (also sometimes referred to as a separation agreement) with the employee. Typically, a severance agreement would give the terminated employee certain benefits in exchange for a waiver by the employee of legal claims and other promises such as a promise to keep the matter confidential. These agreements, however, are not bulletproof - courts would consider these agreements invalid if the employee could show that the agreement was not entered into “knowingly and voluntarily.” Additionally, a terminated employee could still file a charge for discrimination with the EEOC. Even if the severance agreement will ultimately lead to a dismissal of a lawsuit, an EEOC charge, which is typically filed before a lawsuit, could be costly to address and defend.

Lastly, an employment lawyer who’s been practicing in this field forever told me once that in context of the employer-employee relationship, “no good deed goes unpunished.” This is obviously a cynical view that doesn’t hold true in many instances, but it is important to remember that one way to reduce legal risks is by acting decisively when you make the decision that terminating an employee is in the best interest of the company. Now, treating that employee with empathy and understanding as mentioned above is still crucial, but the important point here is that keeping an employee who is a bad fit because you are trying to be nice is doing everyone a disservice and will oftentime backfire in unpredictable ways that could expose you to liability or legal expense when you finally decide to fire that employee.

The decision to terminate an employee is never an easy one and it should not be taken lightly. Using your best business judgment, combined with empathy and an understanding of important legal issues would help you reduce the risk and ensure that the process goes as smoothly as possible, even under difficult circumstances.


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